Thursday, June 23, 2011

Chinese Banking System

FLG read this article on the Chinese financial system by Howard Davies with much interest.

Apparently, the Chinese have recapitalized the banking system. That alone wouldn't impress FLG much. The Chinese have done that before to limited success over time. Of more interest is that apparently the Chinese have had success in reigning in the percentage of non-performing loans. "NPLs amount to little more than 1% of assets," down from 10%.

But here's the best paragraph of all:
Of course, challenges remain. Even in China there is no magic potion that can revive a loan to a defunct exporter. And China’s big banks have lent large sums, willingly or otherwise, to local governments for infrastructure projects – many of them of dubious economic value. There is an ever-present risk that the property market might one day collapse, though banks would emerge in better shape than have banks in the US and the UK, because much speculative investment has been funded with cash, or with only modest leverage.

This is interesting for two reasons. First, FLG will have a deep suspicion of the Chinese banking system, regardless of any metrics that may improve, until the politics get out of it. It's simply to easy for local governments and state owned enterprises to get accomodative loans. Second, it's all about leverage baby, leverage.

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